Wal-Mart's Mexico probe could lead to departures at the top

(Reuters) - Allegations that Wal-Mart Stores Inc stymied an internal investigation into extensive bribery at its Mexican subsidiary is likely to lead to years of regulatory scrutiny and could eventually cost some top executives their jobs, analysts said.

The New York Times said that in September 2005, a senior Wal-Mart lawyer received an email from Sergio Cicero Zapata, a former executive at the company’s largest foreign unit, Wal-Mart de Mexico, describing how the subsidiary had paid bribes to obtain permits to build stores in the country.

Wal-Mart sent investigators to Mexico City and found a paper trail of hundreds of suspect payments totaling more than $24 million, but the company’s leaders shut down the investigation and neglected to notify U.S. or Mexican law enforcement officials, the Times reported.

According to the Times, current Wal-Mart Chief Executive Mike Duke and former CEO Lee Scott, who still sits on the company’s board, were among senior executives allegedly aware of the situation.

“Ultimately, it falls under his watch,” Brian Sozzi, chief equity analyst at NBG, a firm that does investment research, said of Scott. “It falls under Mike Duke, too.”

Other analysts said that Wal-Mart’s structure means any drastic action, such as firings of top executives, may not happen quickly.

Related Coverage

“In many companies people would be asked to step down,” said Consumer Edge Research analyst Faye Landes. “Two complicating factors here are the ongoing nature of the investigation and the composition of the board and the shareholder base.”

The shareholder base includes the family of founder Sam Walton, which owns nearly 50 percent of Wal-Mart’s shares, making it difficult for any activist shareholders to push for any immediate changes. Walton’s eldest son, Chairman S. Robson Walton, known as Rob, and his younger brother Jim are also on the board.

Wal-Mart said in a statement on Saturday it was “deeply concerned” about the allegations in the Times report and began an investigation into its compliance with anti-bribery laws last autumn. It declined to make any executives available for comment, and said the investigation was continuing.

IT‘S COMPLICATED

Even if there are no immediate management changes, experts in bribery laws said Wal-Mart will be forced to devote millions of dollars and enormous amounts of manpower to the investigation.

“The New York Times article paints a troubling picture for Wal-Mart that will likely occupy the company for years to come,” said Michael Koehler, a professor at Butler University and an expert on the Foreign Corrupt Practices Act (FCPA), a 1970s U.S. law that bars bribes to officials of foreign governments.

Re-useable Walmart bags are seen in a newly opened Walmart Neighborhood Market in Chicago in this September 21, 2011 file photo. REUTERS/Jim Young/Files

Wal-Mart said it had disclosed its probe to the U.S. Department of Justice and the Securities and Exchange Commission. The company also said it had taken steps in Mexico to boost internal controls for FCPA compliance.

Richard Cassin, an FCPA lawyer, said Wal-Mart faces an uphill battle to convince the U.S. regulators that its problems are confined to Mexico.

“Before any resolution with U.S. authorities is possible, the company has to look under every stone for possible corruption. Are there any similar issues in China or other countries? That’s what U.S. authorities will want to know. Wal-Mart’s shareholders will be asking the same question,” he said.

Cicero identified Eduardo Castro-Wright as the driving force behind years of bribery, according to the Times, adding that no Walmex leaders were disciplined.

Castro-Wright became CEO of Walmex in 2003 and was named CEO of Walmart US in 2005. He became a vice chairman in 2008 and led e-commerce from 2010 until January this year, and was set to retire July 1. He could not be reached for a comment.

ALL ABOUT IMAGE

The company has been working on its image for years. In 2006, Leslie Dach joined as executive vice president of corporate affairs. Before he joined Wal-Mart, Dach served as vice chairman of public relations firm Edelman, where he ran the Washington, D.C., office, among other areas. He was also previously a strategist in Democratic politics, worked on a number of presidential campaigns and served in Bill Clinton’s administration.

Wal-Mart, which employs 2.2 million people and runs more than 10,000 stores around the world, is often targeted by activists who argue that it underpays its workers and its sprawling stores undercut smaller shops, often putting them out of business, among other concerns.

The bribery allegations have given those critics new fodder.

“It’s going to have huge implications for the current leadership. Frankly it’s hard to image how Mike Duke can remain a credible CEO given the report in the Times,” said John Marshall, a senior markets analyst for the United Food and Commercial Workers capital stewardship program. “It appears that during key moments he was aware of what was going on and apparently may have participated in the cover up.”

UFCW funds own Wal-Mart shares through broad equity indexes that they participate in on behalf of 1.3 million members.

Duke joined Wal-Mart in 1995, has been on its board since 2008 and has been its CEO since 2009. He succeeded Scott, who served as CEO from 2000 until 2009 and has been on the board since 1999.

The New York Times reported on Saturday that Wal-Mart squelched the internal investigation instead of broadening the probe.

Meanwhile, the company generally has tried to present a squeaky clean image. A global ethics office page on its corporate website highlights a quote attributed to founder Sam Walton: “Personal and moral integrity is one of our basic fundamentals, and it has to start with each of us.”